Finance for Growth: Does a Balanced Financial Structure Matter

Revue Economique, Vol. 59, No. 6, pp. 1075-1096, November 2008

BBVA Working Paper No. 0920

Kiel Institute of World Economics No. 445

22 Pages Posted: 13 Jul 2009 Last revised: 16 Oct 2009

Date Written: June 7, 2008

Abstract

In this paper we explore empirically a long-standing question in the literature on finance for growth, namely whether the financial structure - in terms of the size of the banking system relative to the capital markets - matters for economic growth. We build upon the existing literature by constructing a new measure of the “balancedness” of the financial structure which is broader, as it includes the domestic bond market as well as external sources of financing. It is also bounded and more linear than existing ones. We find that a more balanced financial structure - in terms of the size of banks relative to the capital markets - is associated with higher economic growth. Such finding points to banks and capital markets being more of a complement than a substitute. This is in line with Greenspan’s idea of one market serving as “spare wheel” of the other.

JEL Classification: O16, G15, G21

Suggested Citation

Garcia-Herrero, Alicia and Cuadro Sáez, Lucía, Finance for Growth: Does a Balanced Financial Structure Matter (June 7, 2008). Revue Economique, Vol. 59, No. 6, pp. 1075-1096, November 2008; BBVA Working Paper No. 0920; Kiel Institute of World Economics No. 445. Available at SSRN: https://ssrn.com/abstract=1433224

BBVA Research ( email )

C/ Azul,4. Edificio La Vela. Planta 4
Madrid, 28050
Spain

Bruegel ( email )

Rue de la Charité 33
B-1210 Brussels Belgium, 1210
Belgium

Lucía Cuadro Sáez

Banco de España ( email )

Madrid 28014
Spain

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